February 2009 SurePayroll's Small Business Scorecard Review

In a world where every economic indicator is bringing us bad news, our SurePayroll Hiring Index shows strength in small business hiring.

Our February data indicates small business hiring increased by 0.3 percent over January.

This is based on actual payroll data for 25,000 small businesses across the United States. We define a small business as a business with 100 or fewer workers. To prepare our economic indices, we aggregate this payroll data and calculate a 12-month trailing average on small business headcount.

A trailing average allows us to eliminate seasonality factors. Our economic index for hiring includes both employees and contractors. For purposes of calculating small business employment statistics, we believe a new hire is a new hire, whether they are a full-time employee or a contractor.

Statistically, our 25,000 small businesses are a great proxy for the nation's small businesses because they mirror well the national small business’ demographics in terms of geographic distribution and company-size.

Admittedly, one weakness in our Hiring Index is that we don't capture hiring losses for companies that go out of business. If a business doesn’t process a payroll, they don't show up in our economic data.

Nonetheless, our data clearly shows an increase in hiring on average in February. This is an average for the entire small business economy. Some businesses were hiring, some were flat, and some were shrinking. The fact is the businesses hiring demonstrated enough hiring to create net job growth in February.

How Can It Be That Small Businesses Are Hiring?

The obvious question I am frequently asked is: "If small businesses are hiring, how do you explain the high unemployment rate?"

There are a number of answers to this question.

Our Hiring Index evaluates company size as a combination of W-2 employees and 1099 contractors. As we discussed in the January SurePayroll Small Business Scorecard, the trend is that small businesses are using contractors at a growing rate.

We track this metric with the SurePayroll Contractor Index, which stands at 3.82 percent at the end of February 2009. This means that for every 100 workers engaged by small businesses in January, 3.82 are 1099 independent contractors and 96.18 are W-2 employees. This is up from 3.78 percent in the prior month, and it's the highest level we've seen the Contractor Index since we started publishing our economic data.

While our data indicates that small businesses are hiring, they are in many cases hiring contractors rather than full-time employees. We all have acquaintances who are between jobs and who are making ends meet by doing contract work. These folks are fueling the rise in our SurePayroll Contractor Index.

It makes sense that small businesses are hiring contractors over employees because the future is uncertain, and it's easier to terminate a contractor than to terminate an employee. Contractors also cost small businesses less because they don't receive benefits, and employers are not required to withhold employer payroll taxes for contractors.

It's also known that businesses that use contractors tend to be more profitable because they can use contractors on an ad hoc basis. Employing contractors also saves small business because employers don’t need to pay for downtime.

Salaries...Paying Less and Less

Small business salaries dropped again in February.

Our SurePayroll Pay Index was at 1,027 at the end of January and ended February at 1,019, a 0.8 percent decline. That's a big drop.

To put it in perspective, we haven't seen a monthly drop in small business salaries that large since December 2004.

The average small business paycheck in the United States is now $31,317. So while some people are counting on consumers to absorb the pain of bailouts, these days, on average, consumers have less money in their pockets as a result of salary declines.

If you own a business, however, there's never been a better time to invest in employee capital. Whether they realize it or not, the monetary value of prospective employees has decreased.

Small Business Optimism In Short Supply

Even the optimists are pessimistic these days.

For February 2009, our latest reading on small business optimism shows that only 48 percent of survey small business owners are optimistic about the small business economy.

We've lost ground on hope. We have not seen sub-50-percent optimism levels since September 2008. Some of the gains in optimism that seemed to come after the election and during the holiday have dissipated, as it has become clear that the root causes of the current economic crisis are more intractable than many of us originally thought.

Regional and State Performance

The Midwest, Northeast, and South experienced hiring growth in February. The West was the only region that experienced a hiring contraction in February.

Monthly hiring gains for these regions were 0.6 percent, 0.7 percent, 0.5 percent, and -0.2 percent respectively. As in January, the Northeast led the country in small business growth for February.

In February, average salaries declined in all four regions. In the Midwest, Northeast, South and West, salaries declined 0.6 percent, 1.1 percent, 0.8 percent and 0.2 percent respectively.

As depicted in the graphic below, year-to-date results vary by state. The Scorecard comprises data from all 50 states, but we pay close attention to states that we have earmarked as "benchmark states," specifically Arizona, California, Colorado, Florida, Illinois, Maryland, Michigan, Minnesota, Nevada, New Jersey, New York, Oregon, Pennsylvania, Texas, Utah and Washington.

Data for our benchmark states are available – just send me an email requesting the data for your state.

I welcome any questions or suggestions regarding our Small Business Scorecard initiative. You may contact me at malter@surepayroll.com or by phone at (847) 676-8420, ext. 7229.

Best regards,

Michael Alter
President
SurePayroll, Inc.

Questions regarding the SurePayroll Small Business Scorecard can be directed to Webmaster. Webmaster can be reached at media@surepayroll.com or by phone at 847.676.8420